Global Courant
Some people are looking for the cheapest life insurance policy to meet their protection needs. At the same time, however, there are those who like to invest the maximum fund in insurance.
When asked why, they simply answer: more investment means more return. The question here is: is it wise enough to invest in insurance plans beyond the limit, even if those plans are unit-linked? The simple answer is no.
Insurance is not exactly an investment vehicle
The main purpose of having insurance is protection against unforeseen events. To provide the financial protection, insurance companies charge part of the premium as reimbursement and the rest of the amount is used to create the pool of funds to protect those in need. To do this, insurers have different types of offers so that any person interested in insuring themselves can find a plan that suits their financial situation.
Initially, plans were largely traditional in nature and offered a guaranteed minimum return for a specified period of time. Many people did not find this idea of insurance lucrative enough and preferred to use other investment vehicles to get a relatively higher profit. So the insurers came up with ULIPs, which are unit-linked insurance plans, to give better returns or market-based returns to customers. The basic principle of providing protection remained the same.
Take inflation into account to understand if it’s right to overspend
To better understand the concept, factor in inflation and calculate the financial return you would earn over the period. Would the proceeds received be significant enough to meet at least some of your needs? No. You find yourself basically using your own money which is added to the small percentage of the profits your investments can accrue over a period of time. That is not to say that insurance is useless. It’s just that the insurance system works to give you much-needed, timely protection that you wouldn’t be able to take advantage of on your own. So it always makes sense to have insurance, but one should not spend too much on it to get a huge return.
How do you determine if you are spending too much?
There are many general rules that insurance dealers follow to help buyers understand the estimation of their needs. The basic question is: how much life insurance do you really need? To check what you spend enough or more than you should, read and calculate the insured advice amount.
- Insurance equal to ten times your annual income. For example, you earn Rs. 10, 00,000 per annum should buy you a cover of Rs. 100, 00,000.
- Insurance equal to 5 times your annual income plus total debts. If total liabilities are Rs. 70, 00,000 and the annual income is Rs. 10, 00, 000. Estimate comes to Rs. 1, 20, 00, 000, which is Rs. 50,00,000 (510,00,000) plus Rs. 70,00,000.
- Insurance equal to 300 times your monthly costs. Say you spend Rs. 50,000 per month, your coverage should be equal to Rs. 1, 50.00, 000 (50.000300).
- Insurance equal to the amount your family needs. Family needs don’t stay constant for long. Today’s expenses may increase tomorrow as children pursue higher education. If your children are in the earning phase of their lives, expenses should not increase, but decrease. In this way, estimate different needs on an annual basis that are not currently in a scene, but could emerge in a few years. Add up the immediate obligations that crop up upon death and what your family will need for ongoing needs over the number of years you want to protect them financially.
Using the methods above will give you rough estimates of the amount insured you should have. If one of these estimates matches the sum insured of all your life insurance policies with a difference of even a few thousand rupees, then you are on the right track. However, if the total sum insured on your policies is much higher than these estimates, you should investigate.
It doesn’t pay to be underinsured, nor to be overinsured. Adopting an insurance plan as an investment plan is fine up to a point as it offers tax breaks and keeps your financial goals on track, but allocating maximum resources is not a wise decision.
By investing more than you need to, you turn your investment into expense. To get maximum value for your money, invest in insurance only what is necessary and the difference can be used elsewhere to maximize returns.
Are you investing too much in your insurance?
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